Exam 8: Portfolio Theory and the Capital Asset Pricing Model

The efficient portfolios: I. have only unique risk II. provide highest returns for a given level of risk III. provide the least risk for a given level of returns IV. have no risk at all

Sharpe ratio is defined as:

Beta measure indicates:

Beta of the market portfolio is:

Both the CAPM and the APT stress that expected return is not affected by unique risk.

The correlation between the efficient portfolio and the risk-free asset is:

It is not possible to earn a return that is outside the efficient frontier without the existence of a risk free asset or some other asset that is uncorrelated with your portfolio assets.

Normal and lognormal distributions are completely specified by: I. mean II. standard deviation III. third moment

Investments B and C both have the same standard deviation of 20%. If the expected return on B is 15% and that of C is 18%, then the investors would

If the beta of Amazon.com is 2.2, risk-free rate is 5.5% and the market risk premium is 8%, calculate the expected rate of return for Amazon.com stock:

According to CAPM, all investments plot along the security market line.

Briefly explain the term "market portfolio."

The capital asset pricing model (CAPM) states that:

The three factors in the Three-Factor Model are: I. Market factor II. Size factor III. Book-to-market factor

If the market risk premium is (rm - rf) is 8%, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be:

Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta (size) = 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.

A stock with a beta of 1. 25 would be expected to:

Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 10%. Then the stock is:

Portfolios that offer the highest expected return for a given variance or standard deviation are known as efficient portfolios.

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the correlation coefficient between the return of FC and MC.